Understanding Liquidation: Liquid Assets & Wealth Advisor Role & Strategy

Liquidation is referred to as a company closing its business by selling assets to generate cash. The funds are distributed to creditors, employees, and, lastly, to equity holders. The closing marks the end of the company’s operations and the inability to pay the outstanding debts. There are different types of liquidation:

1. Compulsory liquidation: The court orders the company to close its operations, often due to insolvency. 
2. Creditors’ Voluntary Liquidation (CVL):  A formal director-initiated process to close an insolvent company that cannot pay its debts.
3. Members’ Voluntary Liquidation (MVL): To dissolve the operations, the company hires an external MVL (Members’ Voluntary Liquidation) practitioner—a licensed insolvency professional or liquidation firm—to handle the process. The MVL practitioner: 

• Sell the company’s assets, such as inventory, equipment, and property, to generate cash. 
• Pay all debts to creditors and distribute the remaining capital to shareholders.
• File all legal documents with respect to closing the company, which results in removing the name from the registers.  

Once these are completed, the company will be officially closed and will be unable to participate in any trading or business activities. However, in the stock market, liquidation refers to selling stocks, bonds, and other investments to generate cash. An individual can liquidate their position by selling the shares they own in a company.

Meanwhile, liquid assets play a crucial role in liquidation, as it can be quickly and easily converted without a discount. Then, what are liquid assets? 

Liquid assets 

• As the name implies, assets, including stocks, bonds, mutual funds (marketable securities), bank accounts (savings accounts), and cash equivalents, such as money market funds, commercial paper, treasury bills, and short-term certificates of deposit (CDs), can be converted into cash with little or no loss of value. 
• Although cash equivalents and short-term investments are similar, a subtle difference makes them apart. Cash equivalents can be immediately converted to cash, whereas short-term investments require a few days to generate cash after selling. 
• During the liquidation process, the company always prioritise liquid assets to clear off debts by selling assets, unlike non-liquid assets, such as machinery, which suffer significant losses when sold. 
• To be financially stable and avoid selling properties at a lower price in any unintended emergencies, individuals maintain liquid assets that act as a hedge against crises. 

Wealth Advisory Suggestions  

• During liquidation, the main goal is to prevent financial shortfalls and generate quick cash after selling the liquid assets. First and foremost, wealth advisors analyse how the company can generate cash quickly with minimal loss.

• Wealth advisors evaluate the company’s liquid assets (stocks, bonds) and illiquid assets (real estate, machinery or equipment) before strategising the plan. 
• Moreover, advisors suggest selling marketable securities before selling long-term assets like real estate to minimise loss. 
• Advisors follow the legal and financial guidelines to ensure creditors are paid accordingly. 

Wealth Advisors’ Strategies Include 

1. Assessing assets: Wealth advisors assess the value of all assets, encompassing physical and intellectual holdings, to maximise recovery. They plan to sell the assets strategically using different approaches, such as auctions and third-party brokers, to avoid selling at distressed prices.  
2. Tax management: Coordinating with wealth advisors manage the order of liquidation. For example, it helps evaluate the sale of assets with capital gains to those with capital losses, thus reducing the tax impact. 
3. Debt repayment: Primarily, wealth advisors suggest meeting the legal obligations by prioritising repayment of liabilities (loans, employee compensations). Hence, this protects the remaining net worth. 
4. Protecting assets: Utilise irrevocable and dynasty trusts to shift assets outside the estate, thereby reducing future estate taxes.
5. Backup Plan: Set a specific time period, like 6 months emergency fund, to prevent premature liquidation of long-term investments during the transition.
6. Investment Diversification: To manage risk, advisors reinvest in a diversified portfolio of private equity, real estate, and international assets.
7. Personal plan: Wealth advisors help founders or owners in transitioning their business to personal wealth.

To conclude, liquidation checks the business’s financial and operational status. This highlights the company’s capital stress, valuation issues, and time pressures, as well as emotional and reputational stress. It is a process of evaluating, valuing, and distributing resources while adhering to legal and financial rules. Baron Capitale, a trusted wealth management firm, can guide you through this process. 

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